Result: John now has a $16,000 net loss from this investment, for tax purposes. The actual amount will depend on the allocation between land and building as well as the allocation within the building to furnishings, fixtures, etc.Īssume, for this example, that John is entitled to $40,000 worth of depreciation on his $1 million apartment building. Tax break: John also is entitled to take depreciation deductions. That is the $80,000 from operations minus the $56,000 he pays in loan interest. Therefore, his cash flow from the building is $24,000. That’s the excess of rental income from tenants over John’s expenses for utilities, insurance, repairs, etc. ![]() The loan calls for interest-only payments.Ĭounting the cash flow: Assume that the building’s operating income this year is $80,000. He makes a $200,000 down payment and borrows the remaining $800,000 at 7%. John Smith buys a small apartment building near his home for $1 million. The following simplified example can illustrate some of these tax breaks… TAX-FREE CASH FLOW What’s more, tax advantages may make a good real estate investment even better. The pullback in real estate prices in many areas of the US might offer buying opportunities for careful investors.
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